Bailing Out At Energy Company

CT INC.

Management Woes Roil Wallingford Firm

December 20, 2007|By ERIC GERSHON; Courant Staff Writer

Hydrogen and other forms of alternative energy may be the wave of the future, but the local pioneer Distributed Energy Systems Corp. continues to flounder as 2007 winds to a close and top executives make their exits or set up soft landings.

The company recently announced plans to "terminate" President Walter Schroeder as of Jan. 1. Schroeder was a founder of Proton Energy Systems, which became Distributed after a 2003 merger with a Vermont maker of wind turbines and on-site electric power generators, Northern Power Systems.

That news came on the heels of chief executive Ambrose Schwallie's sudden Halloween resignation - less than two years after Schwallie, 60, joined the Wallingford maker of hydrogen generation systems.

Then, this month, Distributed disclosed severance packages for three top remaining executives that would pay them six months worth of salary if they're fired.

For now, the struggling company is being led by its chairman, Bernard H. Cherry, who works "approximately five days per week" at $4,000 per day, operating from his homes in Florida and New Jersey, according to records filed with federal securities regulators.

What the ongoing management turmoil means for Distributed's plans to sell off Proton, for the company's roughly 75 Connecticut employees - and for its future - is hard to gauge. Repeated calls to the company's Wallingford headquarters over the past week, as well as to Cherry's home in Florida, went unanswered. Wall Street analysts have all but entirely abandoned coverage of the company. One major stockholder said he'd forgotten he held Distributed shares.

Distributed has been trying to sell the Proton unit since last summer at least. The slower-than-expected emergence of significant markets for hydrogen products has been among the company's problems.

Distributed reported operating losses and negative cash flow in each of the last three years. For 2006, the company reported a net loss of $55 million, and for the quarter ended Sept. 30, a net loss of $15.2 million.

The company's share price - which once traded above $10 - closed at 43 cents Wednesday on the Nasdaq Stock Exchange, above its all-time low of 28 cents on Dec. 5. The stock price never reached $4 in 2007.

John Fox, a managing director of the private equity firm that effectively owns Distributed, referred inquiries to Peter Tallian, the company's chief financial officer and one of the executives covered by the new severance plan.

"We're just a debt holder here," Fox said.

Tallian and the two other executives whose severance plans took effect Dec. 3, were still employed by Distributed as of last week, Fox said. Human resources director Erika Schramm and Betsy Anderson, the senior vice president for operations, are also included in the severance plan.

Fox's firm, Washington, D.C.-based Perseus LLC, has essentially taken over Distributed in a complex deal involving a series of loans, the first for more than $12.5 million, a promise to sell Proton, and a warrant allowing Perseus to buy millions of DES shares at a below-market price. Fox sits on the company's five-member board.

Once viewed as a promising star in the state's technology sector, Proton, now Distributed Energy, finds itself slipping ever further from center stage.

"This has been a company with an impressive run of creating technology," said Matthew Nemerson, president and chief executive of the Connecticut Technology Council. "What they have not been able to do is find a market."

Cherry, 67, joined the Distributed Energy board in January and was elected chairman in May. Nasdaq has told the company it must raise its stock price above $1 by mid-March to remain listed.